I’d like to thank Charles Komanoff of the Carbon Tax Center
for graciously and intelligently responding to my three
questions for him from last week. He makes some good and strong points,
I think. And so I hand my blog over to Charles:
FS: Please explain how a carbon tax would be simple, transparent,
or equitable, compared to a cap-and-trade system.
CTC: Simple: The carbon tax would be one number
— so many dollars per ton of carbon (though increasing over time) —
levied at the most-upstream point where the fuel is extracted or imported. Since
fuels’ heat and carbon content are already contractually recorded, no
additional measuring would be required. Yes, provisions would be made for possible
carbon sequestration, border tariffs and the like, but overall, a carbon tax
stands in contrast to cap-and-trade as a Mozart sonata to a Wagnerian opera.
We challenge cap-and-traders to come up with a 25-words-or-less description
that a majority of Americans can understand.
Transparent: The carbon tax level would be chosen by Congress and written
in the tax code. No mystery. Cap-and-trade will require a big book of rules,
not to mention an army of auditors, to cover such fortune-making (and breaking)
matters as: Which emissions get grandfathered? Can allowances be banked for
future use? Can they be traded internationally?
Equitable: Across the demographic spectrum, spending on energy declines
as household incomes fall, but the percent of income spent on energy rises.
Either method for putting a price on carbon will be regressive unless tax-shifting
or rebating is built in. The likelihood that revenues will be used to ameliorate
regressive impacts is far greater with a tax, since the magnitudes will be known
in advance and the process will be more public.
FS: What’s wrong with having cap-and-trade “dollars
flow to market participants”? And surely the market knows better than
the government how best to spend money to reduce emissions — wasn’t that
proved by the market in sulfur trading?
CTC: We agree that an economy-wide carbon price, whether
delivered via a tax or cap-and-trade, will be far more efficient at reducing
emissions than the usual jumble of government entitlements. Our characterization
should have referred to market insiders, not participants. The bevy of consultants,
financiers, traders and lawyers fillings those $2,500-a-day seminars on carbon
trading expect to be well-compensated, and not just while the market rules are
being formulated but on an ongoing basis. Cap-and-trade requires lubrication
with generous trading fees, which will siphon off much of the carbon revenues
and intensify the potential for an anti-carbon-pricing backlash. Analogizing
to the successful sulfur-trading market is dubious, as the necessary carbon
market will be up to 100 times larger and entail price pain to consumers. Without
compensatory tax-shifts and/or rebates, we can kiss the whole enterprise —
carbon-pricing and climate stability — goodbye.
FS: You say that a carbon tax would provide certainty about
energy prices. Energy prices aren’t certain now, with no tax; why should
they be certain when there is a tax? And why would energy prices be more volatile
under a cap-and-trade system? I understand that the market in emissions rights
might be volatile, but once an emitter has bought a certain number of rights,
his prices are just as certain as if he was paying a tax, no?
CTC: Yes, once an emitter has bought carbon allowances his
price is locked in, but so what? Ahead of that purchase, the price he pays will
be extremely variable due to fluctuations in demand resulting from the economy
and the weather. Far more importantly for Earth’s climate (and for climate-dependent
humans and other beings), a graduated carbon tax will lend increased predictability
to the future price path of fuels and energy, thus making it possible —
finally! — for millions of carbon-critical decisions (my home purchase,
your car purchase, his factory location, her airframe design) to be both economically
rational and climate-protecting. As Heisenberg might have appreciated, carbon-pricing
lets either the future carbon level or the future carbon price, but not both,
to be fixed in advance. Contrary to Environmental Defense and other cap-and-trade
adherents, it’s the latter that matters more. A recent L.A.
Times editorial said it all: “Entrepreneurs and venture capitalists
prefer stable prices so they can calculate whether they can make enough money
by building a solar-powered mousetrap to make up for the cost of producing it.”